Wednesday, October 16, 2013

Much reporting has been flowing through the business press about what to do with the more $140 billion mountain of cash that is figuratively sitting in Apple's treasure chest in Cupertino. One prominent investor who recently bought $1.5 billion of Apple stock has come forward advocating for a massive equity buy-back as one option to push the value back up, while others say Apple must invest in its own future if it is to ever grow again. Despite continued earnings growth, the company's share price is still 25% off its peak above $700. Why?

Underlying most analyses are a widespread fear
that Apple no longer has what it takes to innovate without Jobs. Essentially, the market had priced in a very high share price based on future growth opportunities viewed to be limitless so long as Steve Jobs's creative brain was at the helm. The release of
the iPad three years ago and the ensuing opening up of an entire new industry
of e-readers—products that consumers didn’t know the needed—propelled Apple’s
stock to stratospheric highs. Investors were convinced that Apple’s wizards could
continue to out-innovate everyone, and were rewarded by soaring stock values.

Now, three years
later, Apple’s stock sags under the weight of heavy expectations. To be
fair, it has only been 3 years since apple revolutionized the e-reader and possibly
the laptop business with the ipad. Since then, incremental advances and
improvements have carried them along reinforced their position of dominance.
But, copy-cats have eaten away at their market share. Android has leapt to the
front of the pack, and all indications suggest that they have more room to
grow. Windows phone like-wise has slowly but surely eaten its way into the
market. Kindle Fire and HD are now credible and cheap alternatives to the ipad,
slowly displacing market share.

Meanwhile, Apple is building a multi billion dollar facility in California to serve as its global headquarters. As an investor, I usually get suspicious when companies start spending their excess cash on massive extravagant homages to themselves, instead of innovation to stay ahead of the game.

Investors have
punished Apple, and rightly so. Its products are no longer unique in a
marketplace devoid of competitors. Indeed, Apple’s competitive advantage in
existing markets seems less certain than ever. Investors who are buying Apple
at its recent low of $400 are hoping that its market cap and fundamental will
carry it, or else that its next product, the iWatch, or a new and improved iTV
will do again for their respective industry what the iPad did for e-reader:
convince consumers to shell out hundreds of dollars for entirely re-imagined
products they never knew they needed.

But many are not so
optimistic. And this puts pressure on Apple. If it can not deliver another
market-revolutionizing product, investors may forever take their money
elsewhere, keeping its stock firmly tethered to earth for the foreseeable. On
the other hand, if it tries and fails, things could be much worse. With all
eyes on Apple, what’s a company to do?

Maybe the Solution is on the Roof

Why not move to an adjacency in consumer electronics: solar panels. They are consumer electronics, that just happen to go on your rooftop. And the industry is presently in a moment of supreme existential reevaluation.

Recently news broke that Apple would be building its
second solar-powered data facility in the Nevada desert. But while media
outlets like Reuters and Cleantechnia gave the company the obligatory
pat on the back for good implementation of its environmental
policy, no one asked the real question:

With the energy sector in such need of revolution, and Apple
such an expert industry revolutionizer, couldn't Apple play a larger role as
not just customer, but creator of clean tech?

Given the ambivalence of boththe media andmarkets toward Apple’s potential for future
innovation (it's stock has slid nearly 40 percent since its high of $702 last
fall), a bold move toward innovation in an industry where innovation is sorely
needed could do more than just save the planet. It could save Apple.

1. Apple needs to 'Think
Different'

Apple is facing an interesting conundrum that only the second
richest company in the world could face: It has too much money than it knows
how to spend on its core business. Faced with this, Apple's leadership has
opted to take what for any other company would be a safe move: paying off their
shareholders with dividends and stock buybacks.

‘Safe,’ that is, for anyone but Apple. For the world's
preeminent innovation role model, breaking a long-standing tradition of keeping
revenues for reinvestment in future growth shows weakness, not strength.
Instead of signaling to investors that Apple was a great bet on value, Apple's
little bribes to its investors signaled that the company was out of
game-changing ideas to invest in.

It has only been 3 years since Apple revolutionized e-readers,
home computing, and possibly reading itself, with the iPad; 5 years since it
changed how humans interact with each other and with the internet with the
iPhone; and 12 since the iPod put the music industry finally and firmly on the
path of digitization. But since then, Apple’s output has plateaued. Android has
leapt to the front of the pack in smart phones operating systems, and all
indications suggest that it has moreroom to grow. Windows phone similarly has
slowly but surelyeaten its way into the market. Kindle Fire and
HDare now credible andcheap alternatives to the ipad,slowly displacing market share, even as the
industry overall continues to grow.

Being on top makes you a big target, and just about every major
device maker in the worldhas Apple in its sights. If Apple is going to
regain its position as the world's preeminent authority in all things
innovation, it's going to need to take its own advice, and "think
different."

2. The Energy Industry
is Ripe for Disruption

Second of all, energy is one of the largest and yet least innovative industries in the
world. Roughly one out of every ten dollars spent globally is spent on energy,
and8 of the top 10 largest companies on Fortune's
500 list of biggest global companies make either oil, cars, or engines (the
only two companies in the top-10 who don't are Apple and Warren Buffet's
Berkshire Hathaway).

But despite being one of the biggest industries globally,
energy companies are remarkably lazy when it comes to research and development,
spending just 0.42 percent of revenue on average on new
technology, according to the Office of Energy Efficiency and Renewable Energy,
or EERE. This is compared to an average of 7.9 percent in the electronics
industry, and 20 percent in pharmaceuticals

This means that the transmission infrastructure technologies we
use in many parts of the country hasn't really been updated since the 1950s.
Power plants we have running today were built in the 1960s. And despite the
rapid growth of data-enabled smart devices, our electricity storage, metering,
appliances, heating, cooling, and transportation systems have for the most part
remained unchanged for decades.

This dearth of innovation makes energy a sitting duck, and a
substantial market opportunity for a well-resourced and ruthless innovator like
Apple. We all saw that iTunes did to the then-teetering record publishing
industry in 2001. Imagine Apple bringing that same innovative force to bear on
the now-teetering fossil fuels industry.

3. Apple has the
financial capital

The pittance of capital trickling into energy R&D means
would-be innovators are hungry for cash. And Apple has cash. Mountains of cash.

Just for a sense of scale: What Apple spends on R&D on OS
X, iOS, hardware, and its other products in one year ($4 billion is projected for FY 2013) would run
the federal government's Advanced Research Projects Agency for Energy, or
ARPA-E comfortably for eight years. With the $140 billion Apple had sitting
idle in the bank at the beginning of this year, it could have funded ARPA-E at
its current funding level for500 years.

Even more ambitious, taking into account both ARPA-E and the
Department of Energy’s larger, older, and more established applied clean energy
research program run by the office of Energy Efficiency and Renewable Energy, aroughly $2 billion research program in
2013—Apple could have run the entire federal clean energy technology research
and development program at its current level for more than 50 years. Again,
this is just with the cash Apple has today.

While it might not be wise to blow all of the company's cash on
a clean technology research shopping spree, the astounding figures indicate
that if Apple wanted to be a contender, it could be. Looking at the private
sector instead of at the government, with the cash Apple has on hand, it could
buy a commanding position inevery single US-based clean tech company to
receive venture funds in the last decade, and still have $100 billion left
over.

4. Apple has the
intellectual and physical capital

Of course, transforming the U.S. energy industry is not as
simple as buying up patents, technologies, or companies wholesale. The right
team with the right tools and the right vision is also needed, but there again
Apple has assets to bring to bear.

Apple's existing supply chain relationships and size-based
negotiating leverage, itsresearch, development, prototyping, and
manufacturing capabilities, and its formidable intellectual property portfolio
all position Apple well to revolutionize clean energy. Apple’sexisting patents on battery, charging, dynamic
data management, andeven solar technologies could serve a
springboard for a broader foray away from powering their consumer devices and
toward becoming a major innovator and supplier of clean technology components.

Whatever additional IP it needed, Apple could license, buy, or
invent. Exactly what kind of clean tech devices Apple might want to make would
be anyone's guess. They are, after all, the innovators.

Perhaps Apple would want to start small, sticking to what it
knows with consumer-focused home clean energy and energy efficiency
technologies, like smart thermostats. Apple could buy Nest, a zesty startup
that isquietly doing to thermostats what the ipod did to music
players. Or maybe Apple would want to create super user-friendly,
easy-to-install solar panels to charge your appliances, power your home, or
sell energy to the grid. Maybe Apple would develop smart meters that seamlessly
send real-time home electrical consumption data to your iPhone or OS X
dashboard, alert you when an appliance has been left on, and saves all data to
your iCloud account. This would of course all be presented with the sleek,
elegant, and simple design sensibilities that are Apple's calling card.

5. Apple has the human
capital

The notion that Apple could revolutionize clean energy is not
new. Greenpeace laid out a “Clean Energy Roadmap for Apple” last summer
calling on the company to go coal free and power its data centers with 100
percent renewable energy. But where Greenpeace and other commentators leave off
is exactly where Apple has the potential to pick up: Apple has the potential to
be not just a consumer but a creator
of disruptive clean technology innovations.

Apple's people are thebest in the world at re-imagining and rapidly
reinventing entire sectors of the economy. They introduced a step-change in the
consumer experience of personal computing in the late 90's, then music in the
early 2000's, phones in the mid 2000's, and now books, games, movies and our
entire digital experience with the iPad in 2009. With nearly infinite resources
at their disposal, and the ability to bring on new expertise as needed, there
is no reason to doubt that the company's innovative ethos couldn't apply to
energy as it has to personal computing, communications, and media.

The notion that a company with such a keen focus on one
industry (consumer electronics) could branch out into something so seemingly
different may seem at first counterintuitive. But then, look at the history of
corporate entities. Google got its start in search, but now makes mobile
operating systems, email, maps, calendars,glasses, and self-driving cars. IMB got its
start in mainframes, then made personal computers, and now has a successful
global B2B technology solutions consulting business. Nokia was founded as apaper mill in the late 1800s and now is a
major wireless carrier. And 3M, the company that makes Scotch Tape, among
thousands of other brands, was founded in 1902 as theMinnesota Mining and Manufacturing Company,
and sold a popular chemical to grinding wheel manufacturers.

Perhaps most iconic, the presence of Richard Branson’s Virgin
Group in more than a dozen unrelated consumer-facing industries proves that
corporate evolution into new markets is neither new nor unusual. And it may be
time for Apple to evolve, or descend into irrelevance as it is slowly consumed
by competition from its own copy-cats.

Apple is at the height of its power, wealth, and brilliance. In
this moment, Tim Cook has a decision to make: whether Apple will count its
blessings, spend its cash on stock buybacks and dividends that do not advance
innovation or open new longterm growth trajectories, and settle in for a slow
decline as competitors slowly whittle away at its dominance in favored sectors.
Or, whether Apple will once again “think different,” and take a
once-in-a-century opportunity to bring its innovative muscle to new markets
ripe for revolution.

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About the Blogger

Sean has spent half a decade working in innovation policy and management. At the Center for American Progress, Sean's policy reports were featured in congressional hearings, legislation, and presidential speeches. Sean was also a founding partner at Canterbury Road Partners, a boutique consultancy dedicated to helping universities understand and monetize intellectual property assets and take new technology to market.